The Maine Educational Loan Authority is a quasi-governmental agency established to assist Maine students and families to achieve their higher education goals by providing an alternative student loan program. MELA currently offers two fixed interest rate loan programs, The Maine Loan and The Maine Medical Loan. For students and families involved in the financial aid process, the following is helpful information in understanding alternative student loans.

What are alternative student loans?

Alternative student loans, also known as private education loans, are available to eligible undergraduate and graduate students to borrow funds up to the full cost of education after financial aid has been deducted. They are a resource that exists to bridge the gap between the full cost of college and traditional financial aid resources, such as scholarships, grants, and Federal education loans.

Students should fully utilize their eligibility for federal education loans such as Stafford loans and maximize other traditional financial aid resources prior to considering an alternative student loan.

Borrow the minimum amount needed.

Borrowers are advised to borrow the minimum amount needed. Take into consideration not only borrowing what you need, but what you can afford to repay. Depending on your program of study, keep in mind that you may need to borrow for two, four or more years of college which could result in a significant amount of debt.

Your credit score.

Eligibility for alternative student loans is based on the credit score of the borrower(s). The Fair Isaac Credit Score is the most widely used score and ranges from 300 to 850. Your credit score can also affect the cost of your debt, with lower interest rates and fees reserved for borrowers with better credit scores. This is why it is often better for a student to apply for an alternative student loan with a cosigner, since the lender usually bases the interest rate and fees on the highest credit score of the borrowers on the loan.

You should review your credit report annually, but at least six months in advance of applying for a loan. This will allow you sufficient time to correct any errors. Federal law entitles you to a free copy of your credit report every year from each of the three credit bureaus: Equifax, Experian and TransUnion or via www.annualcreditreport.com.

Ability to repay debt.

In addition to your credit score, many lenders will look at your ability to repay debt. This is most commonly done using a debt–to–income ratio often abbreviated as DTI. DTI is the percentage of a consumer’s gross income that goes toward paying all recurring debt payments. If your DTI ratio is more than 50%, you probably have too much debt. Ideally you want to have a DTI ratio that is less than 36%.

Compare alternative student loan programs prior to selection.

• How long has the lender been in business and where are they located?

• Does the lender have a good reputation for customer service?

• Does the loan have a variable or fixed interest rate?

– A variable interest rate can change as frequently as every 30 to 90 days. Find out how your interest rate is calculated and how often your rate may change.

– Make sure to research what interest rate you qualify for since lenders often advertise their lowest rate, but not everyone will qualify for that rate.

– Find out the maximum variable interest rate that you can be charged for your loan.

– A fixed interest rate remains consistent throughout the life of the loan and provides stability with respect to your monthly payment. Find out the current interest rate.

• What are the fees associated with the loan and do the fees vary depending on your credit score?

• Are there annual and/or aggregate loan limits?

• What are the repayment options and do the rates and fees vary depending on which option you choose?

– Defer principal and interest:

Make no payments while continuously enrolled in school. Interest is capitalized at repayment. Principal and interest repayment begins six months after graduation or when you are no longer enrolled in school.

– Interest only:

Repay only your interest while continuously enrolled in school. Interest-only payments may begin within 60 days of the first disbursement date. Repayment of principal and interest will begin six months after graduation or when you are no longer enrolled in school.

– Immediate repayment of principal and interest:

Repay principal and interest in a monthly amount beginning no more than 60 days after the final disbursement date.

For more information about The Maine Loan or The Maine Medical Loan program, please visit www.mela.net or call 800-922-6352.

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